ANSYS Inc (ANSS) 2004 Q2 法說會逐字稿

Good morning and welcome to the ANSYS Second Quarter Earnings Conference Call. All participants will be able to listen-only until the question-and-answer session of the call. The conference is being recorded at the request of the ANSYS Incorporated. If any one has any objections you may disconnect at this time. I will like to introduce your speaker for this mornings call, Mr. James Cashman, President and Chief Executive Officer. Mr. Cashman you may begin.

Okay. Thanks a lot. Good morning everybody and welcome to the ANSYS Q2 call for fiscal year 2004. And with me today as always is Maria Shields, our CFO. So, we'll give a general summary to outline the highlights of the quarter and then go into greater depth on the operational results, then of course we'll do our normal look at the numbers from a number of different perspectives and also talk about a pretty impressive array qualitative aspects of progress that we have been making on a wide range or fronts year.

So, in addition to current results we'll discussing, you know, we've also continued to prepare future opportunities with progress on some of the strategic initiatives that we have been discussing for several quarter. So those are some of those. Maria will then take you through our balance sheet, expense structure performance, and outlook on earnings and then we will be happy to your respond your questions. So, to begin with Maria our Safe Harbor statement.

Okay, thanks Jim. Good morning everyone and again thank you for joining us to review the highlights of our second quarter. Before we begin I'll remind everyone that some matters we’re going to discus throughout this call as either part of prepared remarks or will be made in response to questions and that may constitute forward-looking statements. They involve risks and uncertainties which could cause actual results to differ materially from those projected. Our reported results should be not considered an indication of future performance, potential risks and uncertainties could impact our business are discussed at length in our filings including our Forms 10-Q 10-K and our 2000 annual report to shareholders.

I'd also like to take a minute to point out that during the course of this call both Jim and I will be making reference to adjusted revenue and adjusted EPS which are non-GAAP results within the context of the SEC's Regulation G. However, we believe that these non-GAAP financial metrics supplement our GAAP disclosure and are important indicators measuring the underlying business performance and are used by management in our assessment of business performance. A detailed discussion and reconciliation of GAAP measures to those comparable adjusted revenue and EPS is included in this morning's earnings release and the related Form 10-K. With that I will turn it back over to you Jim.

Okay, thanks Maria. Comparable to last few quarters Q2 was another strong quarter in what continues to be an environment that I'd say simultaneously show the signs of difficulty but also hints of optimism papered in their. We delivered on all our major commitments and we exceeded our earlier guidance and course -- course of that posted strong operational numbers. From a high level perspective for the quarter we reported adjusted revenue at 32.1 million which exceed the upper-end of the analyst range. Adjusted earnings per share growth of 35% with an adjusted EPS of 50 cents up from last Q2's 37 cents and this also exceeded both the consensus and the analyst range.

We had continued strong, stable margins and a solid business model that help to insulate us from some vacillations in the economy, excellent progress in integrating all of our product lines and some breakthroughs in technology. And then finally, continuing encouragement from both an industry acceptance and a customer standpoint.

So, looking at the operational highlights. As previously mentioned, our adjusted revenue for the quarter was 32.1 million and this compares to 28.8 million in Q2 of 2003 and represents a 12% increase over the previous comparable quarter. The actual reported GAAP revenue for the reasons that Maria talked about was only slightly lower 32 million, she's already mentioned and will go into more detail shortly. The difference in the number is miniscule and again it's really a [wastage] of our reporting of adjusted results, which we felt was a more indicative indicator of actual business conditions following the acquisition of CFX early last year.

Our earnings also grew with adjusted EPS of 50 cents up from 37 cents per share for Q2 of 2003. And as I mentioned before this is above the consensus and the upper end of the analyst range, and it's the 27th consecutive quarters that we have met or exceeded the analyst expectations. So, I think, obviously, over that length of the timeframe we have been able to execute across a wide spectrum of economic conditions. Overall, adjusted operating margins excluding, of course, acquisition-related amortization were 36%, which is above our traditional business mode, but its' a natural offshoot of the higher than expected revenues.

Adjusted gross margins were also slightly above target at 86% and I think this is actually more indicative of basically ongoing culmination of effective modulation of the various service businesses that we have rolling them into our overall business model. If we look at the 6 months ending June 30, 2004, we reported total adjusted revenue of $63.5 million, which is about an 18% increase over the first 6 months of the last year and included a balance in the increase of both license and service business.

Our year-to-date adjusted earnings per share was $0.97 or 41% increase over the $0.69 of 2003. Overall adjusted operating margins, again excluding acquisition-related amortization, was 36% for the first half compared to last year's 28% and adjusted gross margins were 86%. And, of course, all this help contribute to the cash flow from operations of over $13 million for the quarter and over $26 million for the first half.

Now, if we take a look at some of the numbers from a number of different advantage points, we'll look at categories of business, geographic and customer mix as well as some overall product guidelines. And starting first with categories of business, as I mentioned before, we saw very good balance. For the quarter, the lease business remains strong, it grew and currently represents 22% of our total revenues. Software license revenue grew about 10% for the quarter and 17% for the first half of the year.

Service growth was 14%for the quarter and as usual was primarily driven by our product enhancement subscriptions and software maintenance. For the first half total service grew at 19%. One of the things we have seen is we all of a sudden starting to see an increased interest in major account implementation services for some of the advanced technologies we have been talking about for the past several quarters. I have to say that all major product sectors performed well, lead this time by our high-end products where new licenses grew over 20%, most notably in our ANSYS Multiphysics.

Our upfront simulation products, DesignSpace and ANSYS Professional, they continue to represent just under 20% of ANSYS sales. So they are progressing nicely, but in particular, ANSYS Professional grew at about 35%, which we feel is due in large part to the fact that it has started to migrate to the ANSYS Workbranch integration platform and as such gotten a lot of increase in both power, ease of use, and accessibility.

Business intake, of course, increased also keeping pace with the revenue growth, which is always a good thing for us. It allowed actually our repeatable business base to actually grow to 68% of total revenue compared to 66% of this time last year, and an even 66% Q1 of this year. And as always, maintaining this repeatable business base provides a long-term visibility and also a short-term support during these times of lesser predictability.

So all in all, our deferred revenue stands at over $41.7 million and that's up from a little over $36 million at the end of last Q2. So in addition to our pipeline, license growth, and expanding partner relationship, all of which help propel our business, this base of deferred revenue obviously continues to aid in our overall visibility. So this and obviously aligned with the cash flows I talked about earlier contributed to a strong balance sheet of over a $109 million in cash and equivalents and at the same time we are still continuing heavy investment per our normal standpoints in terms of R&D investment, but also in our global sales, marketing and our business infrastructures.

From a geographic perspective, well, I guess, the bottom line from a geographic perspective is that we continue to see growth in all geographies and sub-regions probably with a slightly greater spread of regional performance, but still growth nonetheless. We saw, what I have to call, mixtures of offensive optimism, but also a heavy lingering restraint in spending. So, it affected all regions to differing extents.

North America continued positive momentum with the growth just under 10% for the quarter and 14% year-to-date. This continues to largely be a paced by our customers and we did see an uptick in the larger order sizes. I have to say, across there continues to be a very broad industry base, probably no one industry that's totally shooting the lights out and no single industry that's not showing some signs of promise. So, it's a real mix bag even in the sub-elements of our business.

Our major orders came from Honeywell, Delphi Automotive, Northrop Grumman, BF Goodrich, Dresser-Rand, Daimler-Chrysler, the Westinghouse Electric, General Dynamics, Boeing, Solar Turbines, so you can see a very broad base in North America. And you also see as this is a pattern that repeats itself throughout the world. Our GIA or General International Area, which is predominated, of course, by Asia-Pacific, grew at a core rate of 12% with basically all major areas performing pretty well, but particularly paced by Japan with a 15% growth rate for the quarter.

Our key customer engagements were strong in GIA also with Cannon, Cummins, Textron, Texas Instruments, Asia Marine Systems, InfoTech, Rico, [Tokyo Material Industrial] and [China ElectroOptics], just a sampling of those. And I think it's pretty interesting from this list is that we are seeing three growth mechanisms that are very evident in GIA. First of all, following our global major accounts as they move in to those other regions, we are also obviously from this list we are providing tools to some of the engineering groups involved in some of the offshore outsourcing and then finally we are also building a healthy base off the growing local industrial base in the region. So, all these things rolled together seem to be a continuing trend and all it lead to a composite growth of just little over 17% year-to-date for the region -- region being GIA and Asia-Pacific.

Finally, Europe continued to progress well with overall core growth of 26% for Q2 and 31% for the first six months. All the major sub-regions are doing well for the first half, Germany led the way with a 30% growth rate for the quarter, but the UK, France and other regions also kept pace with kind of blended an overall composite growth rate of 24%, they are doing a pretty good job of producing.

And, I'd say, well, not as large as in previous quarters, we did have positive impact of currency in Europe for the quarter, but even with that growth was about 20% for all of Europe and still in the high 20s for Germany and some of our better producing regions. Our major European orders came from ALSTOM, [Blayo], [Dyson International], Roles Royce, [Fallus], [Leavehard], Siemens, [Kinkeith], Bosch and SGN. And again, continuing to highlight the overall broad industry coverage, but also nice peppering of the addition some new customers that haven't been on our list before.

So in addition to continued and increased commitment from our large accounts we are encouraged by the increase in the number of larger orders, we also continued to see ongoing performance of our direct offices with an aggregate double-digit growth and with this in mind we’re going to be starting some judicious expression in the second half of the year based on current business levels, but also in preparation for the potential more sustained spending patterns over the long haul.

So in summary, all geographies continued good growth trends and we remain -- and we maintained our industry and customers breadth. There were good signs of potential in every geography and I will underscore though to varying degrees, but we particularly saw -- I have to say a very strong traction of the strategic massage. So nevertheless, we have ongoing evolution, growth and acceleration plans for each region, but that’s basically part of our normal growth and if I could call it an ongoing rejuvenation process. So, we probably be talking about that for some time to come.

Overall, we're encouraged by our major account process, the strengthening of our overall industry breadth, the momentum in our direct offices and of course I have to highlight the broad base of customers that provide our recurring base, which also are turning to be a continuing source of expending opportunities for license business. So we will be continuing a degree of caution through the end of 2004, but we’re seeing various clamors of loosening, but also some remaining pockets of pessimism.

So based on the response to our strategic message, we're planning on starting a controlled ramp up of our customer engagement capabilities in the next few months in preparation for 2005 and beyond. From a products standpoint you know as usual the R&D investments that we continually highlight have also continued to yield increasingly huge dividends in out products suite. Each major product line introduced significant releases in the quarter and if we start with the -- our flagship product line our ANSYS, we released version 8.1. And in the simplest of terms, this release continues a [long] trajectory of simulation advancement in several major areas. And I just try to classify them; first of all, simulation capabilities; second of all, overall usability; third of all, accessibility -- you know, what type of people and what types of market can utilize them and how easily can they get access to them; and then fourth and final is that, integration, and I have to say that all of these that are intertwined and that's a practical matter as well as a strategic matter.

If we focus first on the increase of incapability, they continue to center around the main themes we have been talking about for sometime, its high fidelity simulation, most notably multi physics and non-linear simulation. In particular we take these standard hallmarks of the ANSYS simulation system and we extend them into the ability to analyze the complete system capabilities. We got a range of new contact algorithms that extend the systems and then even allow for addition of multi physics impact such as electric, magnetic thermal contact in addition to mechanical contact with so these things across the multi-component system boundaries are pretty important terms of determining how an overall system is going to perform once it gets out in the field. That's really what we are all about here.

We expanded our unique multi fields to basically ensure accurate load mapping which ensures that the simulation is actually able to manage all of these multiple effects that are going on simultaneously in it. And then we continue to drive all the individual physics, harmonic analysis, and component mode synthesis just to mention a couple of those. We also extended high and low frequency electromagnetics for steady state harmonic and transient analysis and this has an extremely broad applicability from anything from microwave to MEMS devices to bioengineering applications.

Secondarily, I mentioned usability, and we spend significant strides there. Primarily in terms of automated data hand where it take somebody's very complicated simulations that involve multiple bodies or iterations and basically allow to be streamlined you know what it's really doing is allowing very accurate predictive simulations. Make it available to a much broader market and this is very analogues to the way we introduce general simulation to the non-analyst market via the introduction of DesignSpace a few years ago. But I think it’s very key toward expanding the potential base of users for simulation products.

Now with the greater number of users leveraging that and with companies also trying to optimize their [continuity] infrastructure. We have also made advancements in to making our solutions accessible to that broader range of people. So, as such we also released an extended array of infrastructural enhancements including parallel processing, [robot solve], network capabilities, memory management capabilities that allow efficient processing on low cost clusters and even standalone desktop systems. So basically taking advantage of all the investments that our customers have already made in their hardware infrastructure

I have to say -- may be probably the most notable of this is the work that we have done on performance and I think we demonstrated this with a bang couple of months ago. Basically, at that time we announced that we have broken this 100 million degree of freedom barrier and what that really does is it opens the door to the solution of much larger systems, but it -- has been done before so it increase the accuracy and the complexity of problems that can be simulated, but it also reduces the amount of errors that are typically introduced basely by all the abstraction and mathematical manipulation and judgment calls that have traditionally been done to basely fit problem sizes on existing computers. So we are pretty excited about some of the doors that that opens there.

And then finally in the integration we continue to build on the benefits of our Workbench integration platform. It's basically been the basis for advanced infrastructure allowing the performance and optimization gains we are talking about. But probably the thing is most evident is that its really increased the speed at which we developed product and I think we probably have demonstrated that over the past few quarters as we talk about the increases in technology. You know probably key example of this is the leverage that we have experienced in this quarter -- this past quarter release as CFX 5.7. We are able to leverage CFX capabilities which were already powerful but we add up those with Workbench to add you know some of the powerful geometry creation and translation capabilities of the DesignModeler and put those in the fluid simulation. And then we embedded some of the ICEM CFD modeling capabilities and then combine that with ANSYS to basically introduce the first fluid structure capabilities in to CFX. And of course we continue to add advanced capabilities in to mainstream, of CFX new combustion models, turbulence models, just to name a couple.

New version of ICEM CFD and AI environment basely the three -- the 5.0 series were released and this basically takes the model -- the leading modeling solutions for complex multiphysics simulations and leverages the aforementioned advantages of the ANSYS system. So, again I will highlight that the most encouraging aspect of all this is obviously the rate at which we have been able to accelerate our product integration and introduction. So, we can go on for some length on the details of all the capabilities, but I just welcome anybody to visit the website at ansys.com or contact our marketing folks if you would like additional info.

Now, if we look at just the numerical offshoots of some of this technological progress. I previously mentioned our adjusted software license growth was 17% year-to-day. New sales of our high-end products grew over 20% ANSYS multiphysics new licenses grew in excess of 30%. Our ASPs for the quarter actually rose reflecting the sales; a bigger mix of our high-end products indicative of the proportion of multiphysics sales, our design products basically remained stable on the ASP standpoint.

So of all this momentum, the largest issue we continue to have and again, we have mentioned for a few quarters, with the technology progression basically is the efficient evolution of our distribution capabilities, and this is true from both the direct and indirect standpoint, so from this stand, we are basically spending a lot of time on continuous training and expansion of our key customer relationships and that's part of the ongoing investment that I mentioned earlier, that we'll be engaging on at the end of this-- the last half of this year.

Now as I also mentioned there was a wide of range of some qualitative news which we think is kind of indicative of some of the progress that's going in, I'd say basically the combination of our focus, of technical excellence, and business stability, have continued to expand the opportunities that we've had with customers and other industry leaders alike. So apart from just developing technology, and what I call general taking care of business, Q2 was a really busy quarter for us. We announced the new range of partnerships, such as with the National Science Foundation Center, basically with a goal towards helping to revolutionize the product design processes of our customers.

Additionally several of the key competitors in the America's Cup race are using ANSYS to increase their chances and most notably the defending 2003 champ, Team Alinghi, who is actually expanding -- basically already successful use of ANSYS simulation to maintain their competitive edge. We expanded our relationships with several key partners most notably Autodesk who announced that they'll be licensing ANSYS simulation capabilities as part of their Autodesk Inventor Professional product line and then on a kind of a PR Note we are recognized for the fifth time as one of Business Weeks 100 growth companies, our Third Street mentioned in Business 2.0's B2 100 and also FORTUNE Small Business 100.

And if that wasn't enough we also held our Biannual Worldwide ANSYS Conference, and while we heard anecdotally that travel budgets were still high, we have you know, by far the largest best attended event of all time for us, and as part of ISO 9000 matrices we tend to attract formally the, you know the other aspects of that and we basically I had very strong and satisfaction and I haven to say general excitement about our direction and progress. So the bottom line from the product standpoint is accelerated progress and extending our technology base both in core products and our new products lines our acquisitions and you know unified architecture. All this has the consistent focus furthering the impact of simulation throughout all phases of the design and engineering process for our customers. That’s what we have been about and continue to be about and continue excited about.

So in summary we remain committed to and genuinely encouraged by, I mean we really were the -- so maybe I should even say we are excited by the long term strategy direction and mission and with good reason; we have been able to continuously meet operational commitments in a sustained manner to a complete spectrum of situations. It's allowed us to the ability to further invest and, you know, further our technical leadership, invest in the future, expand our universal partners and again, all with that goal of simulation-driven product design in mind.

Our top line is continuing to grow in line with our guidance. We maintained our financial disciplines as evidenced by our gross and net margins, our DSO, a wide range of things and obviously by the fact that we've exceeded or met original analyst earnings consensus for the 27 straight quarters. Our recurring base continues to grow, our major account and customer proliferation activities continue to make progress, and of course this completes the cycle because it allows to continue to further our technology and sales investment with an eye toward keeping that cycle going. So, these investments coupled with our industry and geographic breadths have provided us the capacity to react and adjust to the economic uncertainties at the time.

So, I think that the long term optimism the we’ve been talking about for the -- actually last few years has been demonstrably justified to-date. But so as our short-term comps -- and I will probably some flak about that, but as we mentioned, we’re seeing some positive signs, but we are also continuing to see some pockets of warning. So we continue to maintain a degree of caution, but we do plan to ramp up also a [sanity] our business, in particular customer engagement with an eye toward preparing for the next couple of years.

So with that, I'll now turn it to over to Maria Shields, our CFO, to provide you with a more detailed look at our financials including both the expense structure, balance sheet highlights, and some looks into our guidance. Maria

Thanks Jim. As you usual, for the next minutes I am going to quickly go through a recap of our Q2 and our 2004 year-to-date expense results. I will touch upon some of the key balance sheet and cash flow highlights and as Jim mentioned, I will provide some overall guidance regarding our outlook at this time for Q3 and full year as it relates to adjusted EPS.

Before I get into the recap, I want to reiterate tat the figures that I'll discuss are based upon expenses as a percent of revenue adjusted for the impact of the purchase accounting adjustment relative to deferred software license revenue.

Beginning with cost of sales, if you exclude acquisition-related to -- acquisition-related amortization, cost of sales for the second quarter were 4.4 million and that compares to 5.4 million in last year's Q2 and this resulted in an overall adjusted gross profit margin of 86% for the second quarter. On a year-to-date basis, cost of sales totaled 8.9 million versus 9.6 million last year, also resulting in an adjusted gross profit margin of 86% for the first half. The decrease over last year's second quarter and year-to-date total is primarily related to a reduction in third party royalties as well as some reduced headcount within our global technical support and services organization.

In the area of sales and marketing, for the second quarter, total expenses were 6 million that compares with 6.1 million in last year's quarter and on a year-to-date basis sales and marketing expenses were 12.1 million; that compares with 11.6 million in the first half of '03. The increase in the expenses as compared to last year's year-to-date was largely impacted by two additional months of CFX costs included in 2004 as well as increased cost related to our biennial users' conference that Jim mentioned a few minutes ago. These increases were partially offset by reduced discretionary costs and salary expense.

In the area of research and development, our total expenses for the quarter were 6.5 million over a 20% of adjusted revenue compared to 6.1 million in Q2 of last year and for the first 6 months, our total investment in R&D has reached 12.8 million compared to 11.7 million in the six months of '03. The quarter-to-date and year-to-date increases were the results of increased compensation as well as, I mentioned earlier, the additional 2 months of CFX in 2004's results.

During the second quarter, we capitalized 127,000 of development costs and for the first half, we've capitalize about 388,000, which compares with about 354,000 of cap costs for the first half of 03.

In area of G&A, expenses totaled 3.5 million in the second quarter compared to 3.1 million in last year's second quarter and on a year-to-date basis, G&A costs totaled 7 million compared 5.8 million in '03. The quarterly increase was a result of higher compensation, facilities, and compliance cost. These costs along with the additional two months of CFX also impacted the year-to-date increase. For the second quarter and the first half, we delivered solid operating profit margins excluding the impact of purchase accounting adjustments and acquisition-related amortization of 36%. Our effective tax-rate for both the quarter and year-to-date was 30% and at this time we are anticipating that throughout at least the remainder of this year we should be able to maintain an overall tax rate somewhere in the 30-31% range.

As I talked about in previous calls, we continue to monitor the current proposed legislation initiatives that could invoke changes that would reduce tax credits or eliminate some of the tax saving vehicles which are currently available and they could have the adverse impact on the Company's expected tax rate going forward. Just to mention one briefly, one such example is the federal R&D credit which has yet to be reinstated post June 30, 2004, exploration day.

For the second quarter, ANSYS reported adjusted EPS excluding purchase accounting adjustments and acquisition-related amortization of 50 cents on 16.5 million diluted shares and that compares to 37 cents on 15.9 million shares in the second quarter of '03. And for the first six months, we reported adjusted EPS of 97 cents on 16.4 million shares as compared to 69 cents on 15.7 million shares in last year's first half.

At the current time, including the impact of the second's quarter strong results, we are increasing our outlook of adjusted EPS to be in the range of between 42 and 44 cents for the third quarter and increasing it to somewhere in the range of $1.90-1.94 for full year 2004.

I'd just quickly go through the balance sheet highlights. Our balance sheet at June 30 continued to be quite strong. Cash and short-term investments have grown to an all-time high balance of 109 million. Our consolidated DSO was at an all-time low balance of 53 days. Total gross deferred revenue at 41.8 million and for the fist half we generated over 26 million in operating cash flow. And we continue to remain debt-free. So with that I will turn it back over to you Jim.

Okay, thanks Maria. And so as a recap, steady continued financial performance, meeting commitments to top and bottom line, excellent cash flows, margins and other fundamentals. A balanced growth in most aspects of our business now with additional strength in our high-end products and product licenses, in general. Increasing customer acceptance as indicted by industry measures, geographical measures and order size, and also a range of new technologies that are coming out and increasing quantity and we think provide an ongoing stream of go forward opportunities.

In general, we are slightly ahead of expectations and we are always a little below our own internal aspirations, but with regard to the outlook for the remainder of 2004, we are going to increase our capacities but continue to watch all of the exogenous factors closely. So order -- for instance, order sizes have picked up, but sales cycles have not picked down in terms of being quicker. And I see there are few industries or geographies that have not shown a mixed bag of positive and negative issues involving them. So the long-term outlook stays solid and we are raising our expectations for the year for both revenue and earnings even with our planned of expansion that we mentioned.

So this will net out to a top line growth in the range of 10-12% for the year and earnings in the range of a $1.90-1.94, as Maria just previously said. So with that in mind, we will continue to keep an eye towards ratcheting up the performance totally consistent with our track record in response to the economy and in particular, if starts to warm-up.

So with that, we are now prepared to respond to any specific questions you might have.

Thank you. We will now begin the question–and-answer session. If you would like to ask question, please press "*" "1". You will be prompt to record your name. To withdraw your request, press "*" "2". One moment please for the first question. Our first question comes from Mark Schappel of Key Bank.

Hi, good morning. Nice job on the quarter, first off. Maria, I guess with respect to the average deal size in the quarter, could you give us a sense of what that actually was? I believe that I believe that you have mentioned that it was increasing, but what was the actual deal size -- average deal size?

Well, actually I probably should tackle that one because we are talking about an increasing population size, but as usual it tends to be bimodal, which I think we've talked about for a number of years now. So there is one clump that, you know, kind of the add on the smaller level, but the number increased and we don't normally talk about the overall number of those, but where you might see, you know, low fixed figure being kind of the, if you will, the average of that higher mode in the distribution, you know, seeing it pop up around the 200 -- the higher 100-200 mark. So in general the clumps of that higher mode in average has, you know, that’s the part it’s gone up. And it's noticeable, but it's not earthshaking, but it definitely is statistically valid.

Okay. With respect to the larger transactions, can you just may be comment on some of the trends you saw there in the past quarter versus whether the customer were a little less or less reluctant to do the bid deals?

I am sorry, because the speaker placement I didn't quite hear that. Maria said she did, so I'll let you --

Yeah, can you just go through that question one more time, Mark?

Yeah, with respect to the larger transactions, could you just comment on some of the new trends that you saw during the past quarter [versus] are customers more or less reluctant to do big deals?

I would say the days of million dollar deals probably have bypassed us, what we are seeing at least in our large customer base is they start with pilot programs and once they are able to prove the concept of what they are trying to depict then you see additional add-on to our company. So, in certain situations, they will start within one group and when they demonstrate success then they move on to the next group, but they are kind of doing it in smaller chunks with training and mentoring and then moving it up through rest of the organization.

Yeah, I think -- probably two things, I tried to make a point saying that we’re not seeing the sales cycle decreasing, but the mechanism that Maria mentioned is definitely true for the newer technologies because we're really coming out with some fairly unique and innovative technologies and that pilot program is the way they do it, I think that there is a general watchword, there are probably two major things that are affecting things. First of all is we’re getting more cross disciplinary sales. In other words, those are sales that where traditional buyer would have bought a chunk of that [ANCYS] that was a kind of problem they are solving or a chunk CFX or ICEM CFD products, they're now more combined sales of the integrated product which of course have been facilitated by the Workbench. The second thing I'd say and it's probably pretty core analogy, but it's somewhat aligned with some of the just-in-time precepts of manufacturing a few years ago and I'd say what's happening is as opposed to bigger, lumpier, huger steps of implementation, people are doing them probably in more sustained but smaller granular chunks, but at a more regular frequency and they are doing it more to map with their increasing work pattern. And I think that's probably one of the reasons why some of the big deals we've mentioned, you might see the same company mentioned a couple of time in a year as opposed to once every two years.

Okay, moving on to a little bit [suffered] as you here, in the past you're talking on increasing the company's OEM business, Jim, can you speak to whether you are making any kind of progress on that front, on the OEM front?

Well, I think first of all, we've maintained strength in those -- of that historical ones. Second of all, so much of around Workbench, we've spoken in the past couple quarters of new people who have come on and are actually creating tools based on that. I think last quarter we mentioned CETIM, the French manufacturing entity. This time, we actually mentioned, which basically took a look at embedding a technology and actually selected ours and that will be an ongoing stream.

Okay.

OEM. So, it's just something, you know, OEM relationships in general, they take some time to incubate, they take a lot of effort to keep working well and overtime they can be a very good source.

Okay one final question, then I will let somebody else get on here. Maria, you mentioned that foreign exchange, you did have a little bit of a favorable impact in the quarter. Could you quantify that for us?

Yeah, from an operating profit perspective, for the quarter -- on a year-to-date basis, it was about 855 and for the quarter it was about 360. Top line, it was about 800 for the quarter.

So a top line benefit of 800 and, say, a negative impact of 360, is that correct?

Positive impact to overall operating profit margin about 360 for the quarter.

Thanks.

The next question comes from Scott Barnum of CSFB.

Hi, good morning everyone, great quarter.

Could you speak up a little bit, we are having problems for reason hearing you.

Okay can you hear me now?

Much better.

Okay, great just want to say great quarter.

Thank you.

Last quarter you had guided to about 6-8% revenue growth. It came in at about 11.5. I was wondering if you could just comment a little more detail on what you thought drove the upside, especially since last quarter you had talked about how a number of deals you have dealt had a slid forward into the first quarter? And then if you could follow-up with a revenue expectation for the third quarter, I didn’t hear one earlier.

Well, I'll answer the first question and then turn the general guidance over to Maria because I have stated it's for the year. But in general I think we mentioned that we saw some, you know, we still see some pockets of pessimism and caution in our customers, but we have seen -- I alluded that we have been seen the signs of some pick up and as a result, based at our current levels as well as some of the signs we are seeing, that’s the reason why we are going to be increasing our spending judiciously over the last half of this month. So, obviously some things slid forward into previous because obviously we were able to exceed the forecast that we have been operating [for] that was clearly something and I think that's directly proportional to the some of the signs of optimism albeit a loose [case], haven't totally open by any measure. But then we also started see add-on sales and we did start to see different companies, particularly when they were to open up new locations from our, you know, repeat business from our existing customers. Those are probably the three major mechanisms and in some standpoint that latter one is more difficult to forecast because it will be -- they have already made the decision and is purely financial thing on their decision. So they decided to whatever reasons to accelerate that, we benefit from it if they sit on it, we wait back, but ultimately it's in our famine backlog. Now, you had the second question on the --

Yes, Scott, essentially what Jim mentioned earlier was we are pecking top line growth for the full year of somewhere in the 10-12% range, which was slightly above what we had said the last quarter. I would say probably something in the higher single digit for Q3 just giving the seasonality and the fact that, you know, Europe is a significant contribution and Europe, quite frankly, in Q3 isn't the most dynamic selling environment.

Okay, great. If I could ask another question, your sales and marketing expense, you talked a lot about the biannual conference in the quarter, I had anticipated a bit of a jump on that line, and actually it ticked down just a little. Can you tell me the expenses from that conference, did they all fall in the second quarter or are some them being shifted into the third quarter?

No, the cost for the conference primarily, the large component did close through the second quarter, but we are down a few sales people, which is one of the reasons Jim talked about where we are going to be ramping up throughout the remainder of the year. We are down a few heads from where we were a year ago and we are going to be looking at, you know, as things continue to hopefully go in the right direction, adding some resources to our sales engagement model throughout the world.

Okay, can you give us an idea what the cost was for that conference in the quarter?

In the quarter it was slightly less than half a million bucks.

Yeah, keep in mind some of it is Q1 expense, some of it will trickle in to Q3, but look the majority of it was Q2 and in total we are still in about that range.

Okay. And a last question. Gross margins have ticked up, can you talk about the sustainability of that and the, you know, the reduction in third party proprietary rights or royalty?

Well, there is -- I want to speak to two things just to make sure we got commonality of terms. The sustainability of it -- I would say, the sustainability of our gross margin structure is very good. If you are talking about the sustainability of the increase, obviously, we are not going to continue to rise from 81 to 86 and soon get to have gross margins of a 110%. I mean but -- our normal operating model isn't at 84-85% range, and whenever we have revenue upticks some of that is going to -- to bear out there, because we do have certain fix support structures. There is a certain multiple that we have in terms of when we have third party commissions, you know, royalties for software in there, but nevertheless we got our model metered around that middish 80 standpoint. And we feel that is a sustainable model. We have alluded to the fact that we have been increasing the major count implementation services standpoint we also have a very strong dedicated support network channel out there that does a lot of those things, we focus to the higher-end -- higher leverage part of those. So, I think in terms of sustainability of our overall structure that we've had historically, we feel good about that. But I want to make sure that you aren't taking a trend line from right after we acquired CFX early last year and then when we started to integrate it. I didn't want you to extrapolate that trend line, to come up with something. But -- I tried to clarify, I hope that answered the question though.

Right, it did.

Okay.

I was just wondering if you were going to be able to sustain kind of a mid-upper 80% and it sounds like that's not really what you target long-term --

I think -- no. That's not our target long-term because some of the things we are doing with the advanced technologies we are going to want to increase the high-end service content, now still be good margin, a strong margin business but not exactly the same as a pure software level but we still want to maintain the blend in rate in the range that I discussed.

Okay, great, and I will ask one final question, you mentioned the short-term caution, can you give any specific examples of what might be prompting some of the short-term caution?

It is such a mixed bag and its almost by the time you take all the individual customers you know there is some they are related to uncertainty about the environment -- we've heard things about host selection, we heard things about balancing of the global infrastructure --

IT department -- caught up in Sarbanes-Oxley so not having time to deal with --

That’s a good point. We talk about the huge expenditures that we've laid out for the new compliance regulations but our customers are also doing it and not only for the money thing at the end but many of the people that are involved in deploying and implementing of the solutions they get from us, are also tied up in their own compliance standpoint. So that’s actually slowed down things also. So its quite a mixed bag.

Okay. Thanks a lot.

Thank you.

Our next question is from John Mayada (phonetic) Needham & Co.

Hi. Thank you. I was just wondering Jim if you could talk qualitatively about you know some of the feedback you received from customers coming out of the user group meeting and then sort of you know historically what's been the momentum -- customers --

Well first of all the typical momentum and keep in mind this is a -- there is one thing about this conference where we started to have -- we started to invite open it up to and actually have attendance more managers type -- traditionally been a technology conference and it is still a technology conference, don't get me wrong on that. I mean that’s what we are about. But as -- there has always been a latency in that, the conference first of all in many cases informs people, second of all it reinforces to the point where there is -- there is an awful lot of software vendors out there that, you know, you'll tend to talk about with excitement about what your going to do and a lot of times because people have been burned they are going to say, "okay, that’s sound really good, we'll wait till we see it". Well this is a chance for us to demonstrate. So, one is to introduce, the second stage is to validate, and then the third stage getting toward the adoption.

So with that mind I think some of the new things that we’re showing if in fact we’re truly introducing to a part of that population further 6-9 months, [year lag] kind of standpoint. You know in some cases they will start building into their budgets for 2005. In some cases they'll start a evaluation, you know, for the latter part of this year the beginning part of next year. So there is the range of those things. I say if there was one qualitative assessment -- albeit I will say the overall satisfaction metrics -- well clearly -- the highest over the last five years of these conferences we've had. But I 'd say the -- probably the primary thing was, you'd almost use the word shock at how quickly we were taking some of the vision and turning it into actual products. So, I mean the fact that it was, you know, it was passing the [Missouri test of Show Me]. And that was probably the overriding standpoint. So when we talk about product integration, we talked about multiphysics, you know, clearly when we talked about the type of model sizes we are solving and on the small computers on which we can solve, you know, other problem sizes it was really starting to say, first of all, we’re staying true to our long-term focus. We’re making it much easier to use. We're validating the integration of all the product lines. And we're really able to be tackle within there existing computing infrastructures. I mean those were the major qualitative themes.

Okay, great. Thank you.

The last question comes from Tim Fox (phonetic) of Georgia Bank (phonetic).

Hi, good morning. Just couple of questions around products, Jim, I guess, if you could discuss a little bit about the success you have been having in the high-end and in multiphysics. You spend a multiple quarters now. The perception is largely that this is a more mature market, if you'll, where is the growth coming from?

First of all, I'll actually have to contest you on the question and than I'll try to answer it nonetheless. First of all multiphysics is not a mature market that's something that we have -- we've really been pouting the last few years and there have been a lot of products on the markets that look at individual physics, but, you know, they look at stress so they can do thermal, they can do any range, our electromagnetics. But what you really -- if you really can predict how a product is going to perform out in the real world you have to realize that all of these things are happening together and making compound and you know when the shuttle have some problems it was like [inaudible] of lot of launch vibration but also temperature played a factor. And all of these things combined together can make some pretty serious problems and in many cases things that normally would have been unforeseen by looking at individual physics. So that's something that we've really being the pioneer and driver of. But it also is one that because of all the different disciplines in the coupling of them tended to be one used by high-end analysts. I think by the automated data handling, by working it on easier use computers, with the integration that we got from the Workbench platform. That's the part we are talking about where now we want to bring back it to the [masses] where just like a few years ago when it wasn’t standard for designer to use simulation software, we introduced DesignSpace. Now we have taken this to a level where we would like the designer to be able to do a simulation of a very advanced overall system to get an idea of how the overall product worked with work before even start refining the design of the system or refining a component that’s going to go into the system. Why spend a lot of time refining the design of something that may ultimately not work. So, we think all of these things aim now towards taking this -- what I think is an emerging trend of high-fidelity simulation and now the next layer is bringing that down to the masses, you know, perfecting it and then making it accessible, much the way the personal computer, you know, it gets perfected and then it goes from typing and DOS command or flipping in address switches to point and quick find the user interfaces.

So your strength so far has been limited to selling the multiphysics into the existing analyst phase, if you will, and the next leg up in multiphysics could well be taking it down to the designer level

Well that’s --I'd have -- say its far beyond -- could well be as to -- yes that's it. Not to try to make it to binary of an answer but that definitely is the trend because those designers are the people that are making the fundamental decisions. And the studies for years have shown that sometimes 80% of the cost is locked up, locked into the design after the first 20% of time has elapsed. So, if that's going to be the case lets lock in the optimal cost structure and optimal design early on.

And from a multiple perspective, how many more designers are there from X perspective that are analyst?

[Rough order], I mean -- it's somewhat of a fungible number and also people who were designers -- to answer your question it somewhere in that -- I've heard estimates of 6 or 8 to1 and other estimates are 15 to 1 but on top of that you start throwing into the fact that we can have managers, our designers or analysts that are actually using it to do decision support systems, you know, looking at their own trade offs that without actually doing a simulation, but they are still running off the results of it. We have got marketing people who're actually doing it when they prepare either proposals or feasibility studies for something. So, let's just say that an order of magnitude is not out of the question.

Alright. This is very helpful, and one more if I may round the new sales capabilities, I think Maria said something about worldwide. I was wondering if there is any particular vertical market that you are going to be focusing on from an industry perspective or geographic or this is going to be, as Maria suggested, a direct sales largely across the world?

Well, whenever you got direct sales and channel development -- we mentioned channel development, we mentioned OEM development, we mentioned direct. It’s a part of a balance portfolio that, I think, we have been able to leverage pretty well over the years. So it's investment in all of those. But we'd had such a broad base of industry acceptance that just when it gets into certain geographies, certain geographies sometimes tend to be predominated by a specific industry base. And from that standpoint it takes it on, but in general we have already got a pretty broad range of coverage. We mentioned that we are a little bit -- we are slightly down in the sales thing, but we are also going to ramp it up even higher than beyond that, but those are things we are doing for, you know, we mentioned about the training that goes on with our sales -- with our sales force with the incredible new breadth of products that we have been introducing. And we have some that are able to learn and adapt to that and leverage it and there are other people that are just more comfortable in, what I'd say, the older styles of engagement and as such, you know, I think part of our improving conditions in North America, you know, some of them are macroeconomic, but an awful lot of them are the things that we have done to identify the various capacities of the individuals we have there and their ability to grow and leverage this overall message. So that's where we will continue to invest there.

Thank you, nice execution.

Okay, thank you very much. So I am not sure, I thought I heard that was the last question?

We have no other questions at this time.

Okay, fair enough. So, in close, the traditional kind of short-term caution, I know people love that term, but I'll also add in that some tampered optimism, you know, some of that mixed bag pocketing that we have been seeing. Long-term, I'd have to say we are even increasing our enthusiasm and of course we've raised both ends of our guidance. So at the heart of all this continues to be a solid business model. We have got loyal customers who are actually growing with us and an expanding array of industry partners and as always the bedrock, the employees -- the ANSYS team. So this combination has afforded us consistent performance, expanded our customer base, and as always, we continue to get this expanding base of technology to support our enterprise initiatives. So with all that, I thank all of you and look forward to talking to you next quarter.